SINGAPORE (June 4): CGS-CIMB Research and DBS Vickers Securities are maintaining their “add” and “buy” calls on Sembcorp Industries as they like the group’s latest acquisition of UK Power Reserve (UKPR), the UK’s largest flexible distributed energy generator.
The deal marks one of the first major steps the group has taken in recycling its utilities assets post its strategic review in early-2018.
While CGS-CIMB’s target price remains at $3.49 as it makes no changes to EPS estimates for now, DBS has raised its target price to $4.50 from $4.40 previously after revising FY18 and FY19 earnings forecasts upwards by 3% and 8%, respectively to factor in earnings accretion from UKPR immediately in FY18.
In a report on Saturday, CGS-CIMB analyst Lim Siew Khee says the acquisition could help to lift utilities’ profits as SCI waits for its India unit to turn around or be listed.
Based on his estimations, the acquisition cost of $385 million represents about 10 times FY3/18 P/E, and could potentially add 7-9% or some $30-40 million to the group’s earnings from FY19 onwards.
In Lim’s view, the deal is relatively lower-risk in comparison to other markets as it is cheaper to build at c. £0.5 million/MW vs. the typical US$100 million/MW for traditional Combined Cycle Gas Turbine (CCGT) plants.
“Because the plants are smaller, teething issues are limited. The gradual rollout of plants with an identical configuration is also easier to manage. The shorter time to start/stop the plants makes it more efficient to run. Finally, the UK market will see the mandated shutdown of all coal power plants by 2025, creating demand for more flexible,” he adds.
Lim is also positive on the prospects of UKPR given that it currently has 533MW installed capacity – and is on its way to achieve a total capacity of 813MW in operation by 1H19, considering existing contracts and pipeline for the rollout of its gas generators and battery power generators.
In a separate report, DBS lead analyst Ho Pei Hwa says she is looking for around six months’ contribution in FY18 to add around $10 million in net profits, and over $30 million in full-year net profits in FY19, on a conservative basis.
In Ho’s view, valuations are also currently looking reasonable at 14.4 times trailing P/E multiple after using $26.7 million as the adjusted trailing net profit, which is slightly lower than Sembcorp’s own FY17 P/E multiple of around 14.9 times.
This means that the deal is “definitely earnings accretive to Sembcorp”, says Ho, who adds that while the price-to-NTA multiple of 3.1 times does not look cheap in isolation, it compares well with the normalised trailing ROE of over 30%.
As such, the analyst continues to like Sembcorp for its unique value proposition as a proxy to ride the cyclical offshore & marine (O&M) upturn, and believes the group’s defensive utilities business is undervalued as it is deserving of a re-rating.
“Sembcorp’s India operations are also seeing signs of recovery and a potential IPO there should unlock value,” says Ho.
As at 11:06am, shares in Sembcorp are trading 2 cents higher at $2.95 or 0.7 times Dec-18F book based on CGS-CIMB estimates.
